All Forum Posts by: Arlen Chou

@Sateesh Kumar I have 11 doors in Oakland and will be closing on a 4 plex this week and I recently closed on a 5 plex in Berkeley. Oakland is not a hands off market, but done right can make money. It really is a neighborhood specific city. Some areas are as bad as people imagine and others are actually very nice. 

Yes rent control is a pain in *** and there are tenants who haven't paid. I currently have one that is several months behind, but she is trying to catch up. Not everyone is trying to rob landlords, but they do exist. A 12 plex at $2.2 is not that crazy, but it will mean that it is "workforce" housing and the neighborhood will reflect that. If you like, let me know offline where is property is and I will tell you if the neighborhood is a no-go area. 

Appreciation does also exist in Oakland, it just doesn't rise as fast as properties in hot markets like Mountain View or Palo Alto. 

Good luck!

@Ryan Lam it sounds like you are not hurting for money since you are actually considering holding on to the current home. Many people couldn't swing the coin to go from one Bay Area home to another without selling. Is there are timeline in your move?

It is hard to give specific advice without knowing which city you are in and how much equity you have in the property. However, at a 3.25% 30 year fixed rate, you basically should have free money in your original home loan. It will make cash flowing much easier with a low fixed rate.

If there isn't time pressure and you have a good chunk of equity in the property, I would suggest you hold on to the current home and pull a HELOC BEFORE you get the other property. Pull the cash and "season" it in your account for 3 months. Yes, you will pay interest for 3 months, but it makes your "cash" position look good after the seasoning period.

Make sure the rental income can cover the original loan and the HELOC and then use the HELOC money as your down payment for the next home.

This only makes sense if your home is in a good Bay Area city with appreciation potential. At the very least, it should be in a good neighborhood of a larger city with mixed real estate demographics. The locked in low interest rate you have coupled with appreciation, over time, will create real wealth for you and your family. 

I would be really interested in knowing what signs you are seeing that tell you giving up a 3.25% 30 year fixed rate is a good thing.

I personally have used this strategy in the Bay Area and it has been a force multiplier in my real estate growth. 

Good luck!

Arlen

Hello Stella,

There is a couple in the Bay Area that is doing a very good job with this business model. You should reach out to them and see if they will take you on as a client. They have automated their pricing process and have a team to do their bookings and customer interactions. I am sure building you into their team/portfolio would not be difficult. I don't know what they would charge. @Yuliany W. was active on BP a long time ago, but I don't think she spends much time here any longer. If you need contact just PM me and I will get it to you.

Good luck!

-Arlen

@Manaswi Mishra

The debate on the potential for cash flow in the Bay Area has been going on long before BP was ever created. The fact is that cash flow can be found here and you can also get appreciation at the same time. You can search my older posts where I gave specific examples of deals I closed on. However, I will give you one that I am currently in contract with in Berkeley. I will be closing next month on a 6 unit building that was found on market. I will be buying the building for $200k less than what the seller purchased it for in 2019. The roof is about 10 years old, the windows have all been upgraded to double pane, and the electrical boxes have all been upgraded too. Additionally the seller is doing the sewer lateral. There are 8 stripped parking spaces on the property. These are all 1/1 units and at the point of closing the GRM will be a 9.3. One the 1% rule scale it will be .9%. Everyone has a different tolerance for the amount of leverage in a deal and everyone approaches management/operational costs differently, so I will let you plug your own numbers in to figure out if a deeper cost analysis points to a positive purchase choice in this situation or not. In my case it does, so I pulled the trigger.

I started out with "house hacking" and moved into a "buy and hold" strategy. Over nearly 3 decades, I have to say that the appreciation piece has contributed to my wealth at a much higher rate than cash flow. The difficult part of your question is regarding negative cash flow to appreciation calculations. As an investor, I always look for both pieces in a deal. Only getting one, is like getting a hamburger with only half a bun. In this market, you can find both, but you have to be extremely creative in your search, and your strategy with the property. The property might not start off with immediate cash flow, but you should have a plan in place to get you to that point. To be clear, waiting for appreciation is not a strategy.

As a side note, I have property in Oakland, Fremont, Milpitas, Mountain View, Los Altos and soon Berkeley. The entire city of Oakland is not a high crime area. It maybe be higher than prime areas like Palo Alto or Mountain View, but don't write off an entire city because the news paints it all as a war zone. There are definitely nice areas and definitely sketchy areas as an investor you need to spend the time figuring out where the good areas are located.

Good luck on your journey!

-Arlen

@Abe Rouz

When you first start out don't worry so much about finding the best location or deal, especially if you are house hacking. Look for something in a location that you are comfortable living in and make sure the numbers meet your goals.

By definition, you are buying a place to live that will be used to either generate cash-flow or build appreciation, hopefully both. There are lots of good areas in the Bay Area, but they might not be convenient for your commute or a place you would actually be comfortable living in. As a second layer of analysis, consider if the place can be easily rented out or be sold at a profit after you move on to your next property. I have met many people who fall in love with the idea of house hacking but end up buying in an area they either don't like or feel comfortable living in, just because the numbers look good. The end result for these folks usually turns into a heartache or a nightmare.

When starting out, consider easing into the REI world. An analogy I often use for people getting into investing is running. People would never start their running career with a 10k. They know instinctively to start with running around the block before taking on something larger.

Good luck!

-Arlen

@Wang Windy

The reality of this market is that there aren't many off market deals and to get one, you have to have a very tight relationship with your agent. This tight relationship is not just a personal relationship, but your agent needs to know that you are a "closer" and that you have a good financial base to support your actions. All of my deals have been found on the MLS/Redfin. Finding deals is really about doing a ton of analysis on a weekly basis and finding something that meets your criteria.

Rent control is a painful reality of this market. Your property analysis has to take this into account and you must have a strategy to increase rents following the rules of RC. 

Good luck!

@Wang Windy

Your question is actually very complicated but is really grounded in your personal financial position. "Cash flow" is based on the amount of money you put into the deal. A cash purchase essentially has a 100% cash flow. A property purchased with a FHA loan will probably have a very difficult time coming close to cash flow.

Each of your options have very different financial and personal commitment levels. They all have their own positive and negatives. At the beginning of your journey understanding these difference will potentially save you headaches in the future. What many newer investors fail to realize is that they are not just buying an investment, in reality they are starting a business. 

With that being said, I personally only invest in "buy and hold" in the Bay Area and wholeheartedly advocate this strategy . I have properties that run from Milpitas up to Berkeley on the "Eastside" and I hold properties in Mountain View and Los Altos on the "Pen". I prescribe to the belief that cash flow makes you rich but appreciation makes you wealthy. There are deals to be had right now and there will be more in the near future. Many will say there aren't, but as an example, I am in contract on a 6-plex in South Berkeley for $1.45M. The price is nearly $200k below what the current owner paid for in 2019. The property is at 9.78 GRM (at time of closing) and a .9% on the 1% rule. This is not a dump nor in the "hood". All of the windows have been replaced, the electrical has been upgraded termite inspection only shows $4500 of maintenance type of work. As a side note, because of interest rate challenges, I believe there will be more of these type of pricing drops/opportunities through the rest of the year and into 2024.

As for house hacking, I think it is a great strategy for people who are just starting out with less available cash. Don't think you have to hit it out of the park. You need to find something that will at least get you to cash flow neutral in the near future. That means you must have a plan to get you there, not just hoping the market will get you there.

I personally don't directly invest of state or even out of driving distance because the reality of business is that anybody that you get to take care of your property will probably have larger/more important clients. Getting mindshare is not the easiest thing to do unless you have some mass behind your business. I know many people make it work, but my personal experience is that property managers do not divide their time/resources equally. My out of state investments are through syndications as a "limited partner". My money is safer, because the GP is there to handle everything on the ground. However, this strategy also has its own drawbacks. 

Start with taking a good look at your finances, your skills and evaluate the type of operational pain you are most well suited to handle and build a business plan around that. Good luck to you!

@Tony Kim no doubt there are great places all over the US. I am currently in Dallas Texas just having finished a closing yesterday. I only highlighted the Bay Area because that is where the OP is currently located as am I. I never meant to imply it was the only place or the best place. My point was that a decision to live in a particular place may some time run parallel to a decision on a location to invest, but they are different decisions. 

@Nadine O. There are a few who have replied about investing in the Bay Area vs leaving to go find a new home. I commend you for wanting to jump into the world of real estate investing, it is definitely a good one. Your question is not only about investing but actually grounded in the more personal aspect of lifestyle. I say this because you are actually planning to move to your investment location. In my perspective this actually makes the decision making process more complicated.

The first baseline assumption is that you and your partner have extremely flexible jobs that would allow you to move anywhere without a dire financial consequence. However, if that is not the case then a considerable amount of time should be spent pondering the ramifications of destabilizing your finances. Although getting your cost of living down is something we all should do, you need to keep your eye on the effects of an income change would have on your DTI. As you will be buying your first property, DTI will be mountain that needs to be tamed and if income goes down the move might not have been worth the effort.

Additionally, the coastal states do offer things that fly over states can't, a basic logistical advantage. In this instance, I am applying this to a personal perspective vs an investment perspective. Do you like to travel? As an example, let's pick Hawaii? It is a direct flight from SFO, OAK or SJC. My daughter lives in Dallas. She has to transit through a west coast hub and essentially travels 24 hours to get to a place that is only 5 hours from the Bay Area. Most of Asia is a direct flight too. From your picture it appears you are young, so transiting might not be a big deal. However, when you get up in years like myself a layover REALLY sucks.

I have traveled to many cities in the US and around the globe. I have yet to find a place with so much cultural diversity. I can literally go to my local grocery store and hear 4 or more languages being spoken. I can get good ethnic food from pretty much any country on the planet within a hours drive of my home. When I was substantially younger, I often would go snowboarding in Tahoe and then have a BBQ for dinner in Santa Cruz for dinner in the same day. Yes, those were long days, but extremely fun. I cannot tell you how blown my mind was meeting people in fly over states who had never seen the ocean. I had one employee come to California, for the first time, who actually stopped to take pictures of the hills in Milpitas because she had never seen a "mountain". I literally thought she was joking, but she had never seen anything like them!

Investing OOS state is pretty much a cut and dry checklist that can be completed. But when you say you are going to move to that location, be very careful to separate the decision making process between your personal goals and investment goals. Live where you want to live and invest where it makes the most sense. Remember "cash-flow makes you rich, but appreciation makes you wealthy".

Good luck!

-Arlen

@Sebastian Marroquin you should hold onto the property in the short term and pull the equity out and use that money for purchasing additional properties. 

Besides the headache of additional units in a lower-cost market, the fact is that "cash flow" is a taxable stream of income. The "pro" move would be to pull equity out of your existing unit, with the lowest rate cash out ARM you can find, so the property becomes cash-flow neutral and use the equity to buy another property in an appreciating market. Do the value addition into the new property and increase your NET cash flow via the new property. When using this strategy, you need to carefully look at your DTI and how that will shift after you pull money out. Your ability to rebalance your DTI will be based upon your ability to either raise rents or create additional streams of income in that property. Those additional streams can be through adding units, charging for parking spaces, coin-operated laundry, etc. Rinse and repeat the process as many times as possible. What you will find is that your "good debt" will increase, but so will your bank account and the number of properties you own.

I would plan to get out of the property in 2023 so you can take advantage of the capital gains, hence the ARM loan with a lower rate. You will ALSO be able to do a 1031 on the property at the same time. Not many people know that you can take advantage of both at the same time. There is some serious planning that needs to happen, but if you play your cards correctly you will be able to pull a good chunk of cash out and also defer any additional gains.

At that point, I would move the money into a property that does not have an HOA, either a single or a multi-family property. I know this strategy works because I have done it myself. The one caveat I have for you regarding this strategy is that I did it during the property value upcycle and mortgage rate downcycle. The market is inverting compared to when I did it. But I also feel the danger in real estate exists in all strategies at this time. As a side note, I am personally waiting until the end of the year to buy again.

Good luck!

-Arlen